 David Edmonds rightly saw the transposition
into United Kingdom law of these Directives and the economic regulation
that followed as "at the core of OFCOM".[218]

116. The British Government was "actively engaged
in negotiating, and strongly supports," the new framework
established by the Directives.[219]
As we have already noted in considering OFCOM's general duties,
the duties on OFCOM in fulfilling Community obligations, and most
particularly the policy objectives and regulatory principles of
Article 8 of the Framework Directive and the European Commission's
information requirements, shall have primacy over OFCOM's general
duties under Clause 3 when OFCOM is carrying out its functions
in respect of electronic communications networks and services.[220]
The mandatory character of the Directives and the general support
which their provisions appear to command have limited the range
of proposals for amendment to the provisions of Chapter 1 of Part
2.

117. Concern was expressed by some organisations
about the way in which the terminology and concepts of the EC
Directives were to be translated into domestic law.[221]
We consider some of these concerns later, but Cable and Wireless
raised the broader question of whether the provisions in the domestic
legislation or the terms in the EC Directives would represent
the ultimate legal authority and whether there was a danger of
"two separate, but overlapping obligations" being introduced.[222]
The Government has published on its website detailed tables that
set out the precise thinking in relation to the translation of
the Directives into domestic law.[223]
These tables are not always helpful in explaining divergences
between the two texts and do not tackle the question of legal
authority. Section 60 of the Competition Act 1998 seeks to ensure
that domestic competition law is aligned with European competition
law. We see merit in a comparable measure in the Communications
Bill. We recommend that an additional provision be inserted
in Chapter 1 of Part 2 with the aim of ensuring that, so far as
is possible (having regard to any relevant differences between
the provisions concerned), relevant questions arising under that
Chapter are dealt with in a manner which is consistent with the
treatment of corresponding questions arising in community law,
including in the relevant Directives.

119. Although the concept of general authorisation
subject to notification and conditions is intended to be less
onerous than the licensing regime, it is broader in scope.[226]
Microsoft expressed concern that the scope was in fact wider than
required or justified by the Framework Directive.[227]
Microsoft had four distinct issues of concern.

120. First, Microsoft noted that the definition of
"electronic communications network" in Clause 22(1)
included "software and stored data" used for the conveyance
of signals, but they argued that this inclusion was not justified
by the terminology of the equivalent definition in Article 2(a)
of the Framework Directive. Microsoft contended that this phrase
could extend access regulation beyond its intended scope.[228]
It is not immediately evident whether the reference to "other
resources" in the Directive's definition could be held to
cover software and stored data, nor does the relevant table issued
by the Government elucidate the reasons behind the differences
in terminology.[229]

121. Second, Microsoft noted that the definition
of an "electronic communications service" in Clause
22(2) does not mirror the definition in Article 2(c) of the Framework
Directive in making explicit reference to the exclusion in respect
of "information society services, as defined in Article 1
of EC Directive 98/34/EC, which do not consist wholly or mainly
in the conveyance of signals on electronic communications networks".[230]
Microsoft argued that an explicit reference to this exclusion
would place beyond doubt the understanding that e-commerce services
benefited from the exclusion of content services as defined in
Clause 22(7).[231]
The Government contended that "any information society services
that do not consist in or have as their principal feature the
conveyance of signals by means of a network, would be outside
the scope of the definition of electronic communications service
in any event" and therefore "a specific information
society services exclusion is not necessary".[232]

122. Third, Microsoft noted that Clause 22(3) defines
"associated facility" as a facility which is "available
for use" in association with the use of a network or service,
while the parent definition in Article 2(e) of the Framework Directive
refers to facilities "associated with" a network or
service which "enable and/or support" the provision
of services thereby. Microsoft suggested that the draft Bill's
definition was too wide, embracing a (hypothetical) facility which
is available for such use but is not in fact so used. Microsoft
proposed that the phrase "available for use" be replaced
by "is used".[233]

123. Fourth, Microsoft contended that the definition
of "associated facility" in Clause 22(3) was broader
than was warranted by Article 2(e) of the Framework Directive,
since the draft Bill's definition includes a facility which is
available to support the provision of "other services"
provided by means of the network or service - other, that is,
than the electronic communications service in question. It is
certainly arguable, however, that this term faithfully reflects
the reference in the Directive to "facilities which
enable and/or support the provision of services" via the
network or service in question.

124. We are not convinced that Microsoft's central
contention - that the scope for notification in the draft Bill
is wider than that in Article 2 of the Framework Directive - has
been established, but Microsoft has performed a valuable function
in highlighting in the case of Clause 22 the difficulties of transposing
the provisions of the Directives into domestic law. We recommend
that, in its response to our Report, the Government reply to the
concerns expressed and explain in more detail its reasoning for
the way in which it has translated the provisions of Article 2
of the Framework Directive into domestic law in Clause 22.

126. Under Clauses 35 and 36, operators may be made
subject by OFCOM to conditions of two kinds - general or specific.
General conditions, as the term implies, apply "generally
to every person providing an electronic communications network
or electronic communications service of a particular description".[235]
The scope of such conditions is limited to provisions authorised
or required by Clauses 38, 39, 43, 44 and 49. Oftel has begun
a consultation process on 23 draft general conditions; it has
sought responses to that consultation by 13 September 2002.[236]
With the salient exception of proposed "must-carry"
and "must-offer" conditions which we consider separately
below, the Clauses governing general conditions have attracted
relatively little comment during our inquiry. AOL UK was concerned
about the potential for duplication between general conditions
and consumer protection laws and about the lack of reference in
Clause 45 relating to telephone numbering to the policy goal of
minimising the costs of routing calls across the telephony network.[237]
The Consumers' Association sought reassurance about the grounds
for approval under Clause 40 of conditions relating to customer
interests.[238]

127. The second type of conditions that can be set
by OFCOM falls into four categories:

a universal service condition;

an access-related condition;

a privileged supplier condition;

a significant market power condition.

 We comment later in this chapter on evidence
we received on the first, second and fourth types of condition.
Privileged supplier conditions under Clause 62 were not the focus
of evidential interest during our inquiry.

128. The draft Bill creates (with the exception of
information provisions where OFCOM has the additional option of
prosecution) a broad common framework for the enforcement of the
provisions of Chapter 1 of Part 2.[239]
The same basic procedure applies in respect of failure to make
a notification under Clause 23, failure to pay a charge fixed
by OFCOM under Clause 30, contravention of any condition set under
Clause 35 and contravention of restrictions or conditions of the
electronic communications code under Clause 85:

stage one: OFCOM sends
the person alleged to have committed the breach a notification
and requires that person to make representations and remedy the
breach and any consequences within a specified period of time
(Clauses 26, 31, 74 and 86);

stage two: if full
remedy has not been made within the specified period, OFCOM may
serve an enforcement notification requiring specified action,
which is enforceable in civil proceedings (Clauses 27, 75 and
87);

stage three: OFCOM
may, in addition to, or instead of, stage two, impose a penalty
for non-compliance with a notification or an enforcement notification
(Clauses 28, 32, 76 and 88);

stage four: OFCOM
may issue a direction to suspend or restrict entitlement for serious
and repeated non-compliance which the use of stages two and/or
three has not remedied (Clauses 33, 78, 79 and 89);

stage five: contravention
of a direction issued at stage four may be an offence subject
to a fine and may be the subject of civil proceedings (Clauses
34, 80 and 81).

129. BT expressed concern at the general severity
of the enforcement regime compared with that under the Telecommunications
Act 1984.[240] They
argued that the nature of the penalties meant that "they
should attract the protection of Article 6 of the European Convention
on Human Rights as though they were criminal penalties".[241]
They contended that the draft Bill, if enacted as it stands, "might
be found not to be compatible with Convention rights".[242]

130. The Joint Committee on Human Rights has examined
the enforcement provisions of the draft Bill in the light of its
extensive previous experience of examining administrative enforcement
and charging systems and has concluded that the provisions (taken
together with the right of appeal to a judicial tribunal that
we examine later) do not give rise to a serious risk of incompatibility
with Article 6 of the Convention.[243]
The penalties are also analogous to those in the Competition Act
1998. These have been tested and, as BT know, in Napp Pharmaceuticals
v DGFT, the Competition Commission Appeal Tribunal (CCAT),
in considering this matter observed that the proceedings may be
"criminal" for the purposes of Article 6 of the Convention,
thereby implying the right to a "fair and public hearing
within a reasonable time by an independent and impartial tribunal
established by law" (Article 6(1)), to the presumption of
innocence (Article 6(2)), and to other rights (Article 6(3)).[244]
The burden of proof will rest on OFCOM to prove the infringements
which lead to such penalties, given their severity. However, as
the CCAT went on to say, and contrary to BT's submission to us,
"neither the Convention itself not the European Court of
Human Rights has laid down a particular standard of proof that
must be applied in proceedings to which Article 6(2) or (3) apply";
and they go on to say "in our view the structure of the [Competition]
Act points to the conclusion that under domestic law the standard
of proof we must apply in demanding whether infringements of Chapter
I or Chapter II prohibitions are proved is the civil standard,
commonly known as preponderance or balance of probabilities, notwithstanding
that the civil penalties imposed may be intended by the Director
to have a deterrent effect". We therefore share the opinion
of the Joint Committee on Human Rights.

131. Nevertheless, BT have raised a number of important
practical concerns about the potential difficulty for a provider
in interpreting the requirements of OFCOM under the enforcement
procedures in respect of contraventions of conditions, noting
in particular that there is an obligation to make representations
and to take remedial action in parallel.[245]
Clifford Chance have also highlighted respects in which there
are fewer procedural safeguards for the enforcement of these sector-specific
powers than for the exercise of Competition Act powers.[246]
We recommend that the Government clarify whether its intention
is that procedural safeguards for the enforcement of sector-specific
powers under Chapter 1 of Part 2 should match those in the Competition
Act and respond to the particular concerns in this regard raised
in evidence.

132. The penalties that can be imposed by OFCOM under
its sector-specific powers are set out in Clauses 28, 32, 77 and
88. These derive from the general permission under Article 10(3)
of the Authorisation Directive for relevant authorities to "take
appropriate and proportionate measures" and for Member States
to empower those authorities "to impose financial penalties
where appropriate". The text of each Clause reflects the
requirement that financial penalties are appropriate and proportionate.
The maximum penalty under Clauses 28 and 88 is £10,000, although
this amount may be varied by order subject to negative resolution.
The maximum penalty under Clause 32 is twice the annual charge
levied, although this multiplier may be varied by order subject
to negative resolution. The Government's stated intention is that
the power to vary penalties under Clauses 28 and 88 "would
not represent any change of policy, but simply maintain the effectiveness
of the level of financial penalty applicable, principally in order
to take account of inflation".[247]
We share the view of the House of Lords Delegated Powers and
Regulatory Reform Committee that the power to vary maximum penalties
under Clauses 28 and 88 either ought to be explicitly confined
to changes in the value of money or otherwise ought to be subject
to affirmative resolution. We recommend accordingly. We further
recommend that the power to vary the multiplier for the purpose
of calculating the maximum penalty under Clause 32 be subject
to affirmative resolution.

133. The maximum penalty under Clause 77 for contravention
of a condition of an enforcement notification under Clause 74
relating to a breach of a general or specific condition under
Clause 36 has attracted considerable comment. Under Clause 77,
the maximum penalty is 10 per cent of the turnover of the relevant
business. It is thus the same maximum penalty as that provided
for under section 36 of the Competition Act 1998. This power to
fine was seen by David Edmonds as "an important new weapon"
for OFCOM in exercising sector-specific powers.[248]
BT and the mobile phone operators viewed these penalties as excessive.
Vodafone argued that they might serve as a disincentive to innovate.
It was also suggested by the mobile phone operators that the availability
of powers to fine under sector-specific powers on the same scale
as under the Competition Act would serve as a disincentive to
use Competition Act powers.[249]

134. We are not persuaded by the arguments that OFCOM
should have fewer sanctions available to it in the exercise of
sector-specific powers than in the exercise of Competition Act
powers. It would anyway seem to us undesirable in principle that
the mechanism to be employed by OFCOM might be determined by the
different penalties available rather than by the nature of the
market. Indeed, we wish to see more precise equivalence between
the two sets of penalties. The maximum penalty under section 36
of the Competition Act 1998 cannot be varied by means of secondary
legislation. The power to vary the turnover limit in Clause 77(5)
is inconsistent with the earlier Act and opens up the Secretary
of State to perpetual lobbying by industry to see the limit reduced.
We recommend that the order-making power in Clause 77(5) be
removed; if it is retained despite our recommendation, it should
most certainly be subject to affirmative resolution procedure.

135. We wish to make one further recommendation on
this issue, again arising from the principle of equivalence with
Competition Act penalties. Under section 38 of that Act, the Director-General
of Fair Trading is required to issue guidance as to the appropriate
amount of any penalty, drawing in part upon penalties imposed
in other EU Member States. In the early days of the operation
of the new framework, it will be difficult for OFCOM to use comparators
in the same way as the OFT has been able to draw upon European
competition law. Nevertheless, potential recipients of penalties
are entitled to some prior warning about OFCOM's interpretation
of appropriate and proportionate penalties. We recommend that
OFCOM be placed under a statutory duty to prepare and publish
guidance on the interpretation of appropriate and proportionate
penalties in Part 2 of the Bill.

136. Clauses 94, 98 and 99 of the draft Bill empower
OFCOM to obtain certain information for certain purposes. The
information requirements under Clauses 98 and 99 relate to general
enforcement provisions under Chapter 1. The information provisions
of Clauses 98 and 99 are themselves supported by enforcement powers,
including criminal penalties of fine and imprisonment set out
in Clauses 100 to 103. The information requirements under Clause
94 relate to OFCOM's power to give assistance to parties in certain
legal proceedings. There are significant variations between the
two sets of information provisions.

137. Clause 94(3) provides a person with protection
for the privilege against self-incrimination and for items subject
to legal professional privilege; this protection is viewed as
adequate by the Joint Committee on Human Rights. However, both
that Committee and BT have pointed out that there is no equivalent
protection for individuals in Clauses 98 and 99, even though OFCOM's
enforcement powers could entail legal proceedings.[250]
The Joint Committee on Human Rights viewed this omission as "a
serious matter".[251]
So do we. We recommend that Clauses 98 and 99 be amended to
provide protection against self-incrimination and for items subject
to legal professional privilege.

138. Clause 99 restricts the circumstances in which
OFCOM can impose information requirements under Clause 98. Clause
104 imposes a further requirement on OFCOM to issue a policy statement
on information-gathering under Clause 98. Neither of these constraints
apply to information-gathering under Clause 94. The Joint Committee
has expressed serious reservations about the absence of conditions
constraining the information-gathering power under Clause 94.[252]
We share this concern and find the absence of constraints on
information-gathering under Clause 94 puzzling in view of the
restrictions imposed by Clauses 99 and 104 on the other information-gathering
powers under Clause 98. We recommend that information-gathering
powers under Clause 94 be subject to restrictions analogous to
those under Clauses 99 and 104.

139. The Joint Committee on Human Rights has also
raised more fundamental concerns about the power of OFCOM to support
a party to legal proceedings relating to the electronic communications
code in Clause 93 - the power to which information-gathering under
Clause 94 relates. That Committee has argued that the powers as
they stand could jeopardise the principle of "equality of
arms" in legal proceedings.[253]
We urge the Government to give the most careful consideration
to that Joint Committee's concerns about Clause 93.

140. In addition to OFCOM's enforcement powers, Clause
106 sets out powers for the Secretary of State to direct OFCOM
to require a service provider to suspend or restrict that service;
non-compliance is an offence under Clause 107. The Secretary of
State's powers can be exercised "to protect the public from
any threat to public safety or public health, or in the interests
of national security".[254]
The Joint Committee on Human Rights has argued that the Secretary
of State should be permitted to intervene only where she has reasonable
grounds to believe or suspect that it is necessary to do so.[255]
We again urge the Government to give the most careful consideration
to that Joint Committee's concerns about Clause 106.

141. Finally, on a related matter, the Government's
original memorandum on issues on which new or amended Clauses
will appear when the Bill is presented referred to further consideration
being undertaken on national security issues.[256]
We asked the Government to elucidate this opaque reference. It
told us that this was a reference to continued consideration on
how to "update" section 94 of the Telecommunications
Act 1984, which gives the Secretary of State sweeping powers to
issue directions of a general character to the regulator or public
telecommunications operators if it appears to her "to be
requisite or expedient to do so in the interests of national security
or relations with the Government of a country or territory outside
the United Kingdom".[257]
The Government sees the need to update these powers to reflect
the removal of the concept of public telecommunications operators.[258]
Since that power was enacted, the Government has given itself
extensive powers in respect of communications service providers
under the Regulation of Investigatory Powers Act 2000 and the
Anti-terrorism, Crime and Security Act 2001.[259]
Before undertaking a technical revision of section 94 of the
Telecommunications Act 1984, the Government should ask itself
the prior question of whether such broad powers are either required
or compatible with Convention rights. If the provision is retained
in an amended form, we recommend that the Government, in its response
to this Report, give an account of the use to which the provision
has been put and an explanation of how it is envisaged it might
be used in future.

143. We turn first to some of the provisions of Clause
49, since this consideration itself serves to illustrate the difference
in kind between pre-legislative scrutiny of Clauses and examination
of policy proposals. Subsection (3) lists the public service channels
to which "must carry" obligations are initially limited:
these are all licence fee-funded BBC public services, any digital
Channel 3 service, Channels 4 and 5 in digital form, S4C Digital
and any digital teletext service provided on spare digital capacity.[264]
Subsection (4)(a) gives the Secretary of State a duty to review
this list periodically, in accordance with the provisions of Article
31(1) of the Universal Service Directive. Subsection (5) gives
the Secretary of State a power, subject to negative resolution,
to modify the list of "must-carry" services.[265]

144. The extension of the "must-carry"
list is a matter of considerable public interest, as is the matter
of "must-offer" to which we refer later. The Government
envisages that this power might be used to include "further
channels which may have a general public service remit, or may
offer Government or local information services".[266]
The latter approach was attractive to the Community Media Association
and to community broadcasters who contributed to our online forum.[267]
NTL and Telewest, on the other hand, were concerned at the absence
of linkage between the power to add to the list and the delivery
of public service broadcasting objectives.[268]
In response to a request from the House of Lords Delegated Powers
and Regulatory Reform Committee, the Government said that it envisaged
that the criteria for addition of a service to the "must-carry"
list would be as follows:

"its public service remit;

its importance for social inclusion, on a national
or a local basis;

its unavailability by other means for a significant
proportion of people using the platform".[269]

145. The Government also drew attention to its commitment
in the White Paper to consult OFCOM before adding to the list,
to take account of capacity constraints, and to ensure that "such
obligations are proportionate to the purpose and leave the great
majority of capacity for normal commercial uses".[270]
The House of Lords Delegated Powers and Regulatory Reform Committee
has raised the possibility of the criteria to be employed in exercising
the power to add to the list being placed on the face of the Bill.[271]
We support this approach. We recommend that Clause 49(4) and
(5) be amended to specify a requirement on the Secretary of State
to consult OFCOM and affected parties in carrying out a review
of the list of "must-carry" services and to have regard
to the public service benefit of any service, to capacity constraints
and to the principle of proportionality in coming to any decision
leading to an order under subsection (5).

146. The other main component of Clause 49 relates
to the terms of trade of "must-carry" obligations. Subsection
(4)(b) requires the Secretary of State to conduct periodic reviews
of these terms. Subsections (6) and (7) allow her to impose requirements
as to the terms or make provision about how OFCOM is to determine
such terms.[272] This
Clause is intended principally to cover cable services.[273]
At present, public service channels are provided on cable without
charge to either party, on the grounds that the cost of carriage
is offset by the value derived by the cable operators from carrying
those channels.[274]
The Government's stated policy is that any new "must-carry"
channels will be added "subject to reasonable remuneration
for the relevant operator".[275]

147. The main policy aim underlying the proposed
new Clauses appears to be that, "after digital switchover,
all the [public service broadcasting] channels have a right to
be carried on all the main platforms and a duty to secure carriage".
It was suggested by BSkyB and the Satellite and Cable Broadcasters'
Group that there was no need for "must-carry" rules
at all even after digital switchover: the requirement on BSkyB
to provide access on "fair, reasonable and non-discriminatory
terms" would ensure a successful outcome in commercial negotiations
between the public service broadcasters and BSkyB guaranteeing
such availability in future.[276]
The Government appears unpersuaded by this argument, since a major
element of the additional draft Clauses is the creation of a new
"must-distribute" obligation upon satellite packagers.[277]
This involves the establishment of means of enforcement for such
an obligation akin to the enforcement mechanisms that we have
already discussed. We have not had an opportunity to examine these
provisions in any detail, but we note, however, that Oftel has
recently examined these arguments.

148. The Government is also seeking to impose two
new duties on public service broadcasters. The first is an obligation
to offer their service on the main platforms so as to preclude
the levying on viewers of any additional charge for their channels,
known as "must-offer".[278]
The second is an additional system for the provision to a viewer
who cannot satisfactorily view public service broadcasting channels
otherwise than by satellite, free of charge, of a device required
to allow them access only to the public service channels by satellite
- the "solus card". The public service broadcasters
jointly are to be required to make arrangements between themselves
to fund this provision.[279]

149. The document provided to us on 3 July by the
Government fails to clarify its position on two outstanding issues.
The first is the terms of trade for the carriage of "must-offer"/
"must-distribute" services on satellite. The Government
is still "considering whether, consistent with the European
Directives, the Bill could contain provisions to ensure that OFCOM
will be obliged to consider the special position of public service
broadcasters when regulating the price of access to satellite
conditional access systems".[280]
This may hinge in part on an interpretation of Article 31(2) of
the Framework Directive that permits Member States to determine
remuneration for "must-carry" obligations "while
ensuring that, in similar circumstances, there is no discrimination
in the treatment of undertakings providing electronic communications
networks".[281]
BSkyB argues that any additional costs for conditional access
for public service channels are justified in accordance with the
obligation to provide services on fair, reasonable and non-discriminatory
terms.[282] The public
service broadcasters contend that the current charging system
does not reflect the value such services bring to a satellite
service and entails a subsidy for aspects of the satellite service
that are not related to the distribution of free-to-air services.[283]

150. Second, the latest document does not answer
the vexed question of why "must-carry" obligations are
only to be imposed at an indeterminate date in the future. At
the time of the draft Bill the Government referred specifically
to "must-carry" obligations "after digital switchover".[284]
The latest document hints at movement in the Government's position
by stating that the new provisions

"may not be needed until
switchover, and a commencement order may not be made until the
date for switchover has been set, or at least until the likely
date is more certain (as the powers could be used to help create
the conditions for switchover)."[285]

 The public service broadcasters were
united in arguing that the issue of "must-carry" had
to be resolved in the near future as a means of supporting the
move towards digital switchover.[286]
The ITC also wished to see the provisions engaged "sooner
rather than later".[287]

151. The inclusion of "must offer"/ "must
carry"/ "must distribute" Clauses is intended to
deliver the public policy objective of universal availability
of public service broadcasting channels. The broadcasters are
not permitted to charge the public for receipt of these channels,
and the distributors and packagers do not pay the subscription
fee that would usually reflect the value of these channels to
their services. We therefore believe it would be appropriate for
OFCOM to determine the basis on which payments should be made
by broadcasters to distributors, taking into account the nature
of the costs accruing to each party to the arrangement. This would
be in line with the role currently performed by Oftel in relation
to the charges levied on public service broadcasters (and others)
for satellite conditional access services. The broadcasters also
contend that, in the case of digital satellite, they are being
forced unnecessarily to use the conditional access system to provide
the regional versions of their services and that there are more
cost effective ways to do so.[288]
BSkyB argue that this is an entirely incorrect characterisation
of the way their sophisticated conditional access system works.
As the most successful digital television provider, they argue
that this is technically the most effective way regionalisation
can be provided. Oftel has recently addressed issues relating
to conditional access charges for public service channels in its
8 May report on The Pricing of Conditional Access Services
and Related Issues.

152. Tessa Jowell characterised the proposed provisions
on "must carry"/ "must distribute"/ "must
offer" as "a failsafe".[289]
We see no logic in the Government providing itself and OFCOM with
a valuable failsafe and then circumscribing the time at which
it can be used. We recommend that the final Bill seeks to give
effect to the "must-carry"/ "must-offer"/
"must-distribute" arrangements on all platforms and
the most effective solution to regional distribution, as determined
by OFCOM, at the earliest possible opportunity.

154. Clause 50 requires the Secretary of State to
publish a notice defining the obligations to be secured by universal
service conditions. This notice is to be "for the purpose
of securing compliance with Community obligations", namely
the obligations set out in Chapter II of the Universal Service
Directive.[293] AOL
UK queried why the Secretary of State was being given a power
to specify the obligations by notice when they are set out in
the Universal Service Directive.[294]
We presume that the arrangements in Clause 50 are being made
to enable the Secretary of State to give effect to any revision
of universal service obligations arising from a review by the
European Commission under Article 15 of the Universal Service
Directive, although we consider both the Bill and the Explanatory
Notes could be clearer on the linkage between the definition in
that Directive and the Secretary of State's powers under Clause
50.

155. Clause 51 provides for designation of universal
service providers by OFCOM; Oftel will be consulting in due course
on the designation of appropriate providers to ensure the provision
of the universal services.[295]
Clause 52 provides for universal service conditions generally.
Clause 53 relates to the tariffs and pricing structure for universal
services. Clause 54 covers directory and directory enquiry facilities.
In general terms, we are satisfied that these provisions give
faithful effect to the relevant articles of the Universal Service
Directive.

156. Our one concern relates to the balance of responsibilities
between the Secretary of State and OFCOM with respect to pricing
issues. Patricia Hewitt thought that the balance in the draft
Bill was right.[296]
We are not convinced. As the draft Bill stands, the Secretary
of State may include guidance about pricing matters in the universal
service notice.[297]
OFCOM is required to "have regard to any guidance about matters
relating to pricing" contained in that notice.[298]
Nevertheless, after the initial notice is issued, all matters
relating to pricing structures are matters for OFCOM. This does
not mirror a comparable division of responsibility between NRAs
and Member States in Articles 9 and 10 of the Universal Service
Directive, since some of the functions assigned to OFCOM under
the Clauses are ascribed to "Member States" under the
Articles.[299] We
consider that, given the wide political and social significance
of pricing for universal services, the Secretary of State should
play a more direct and politically accountable role in the matter.
We recommend that this aim be secured by amendments along the
following lines: the Secretary of State should be required under
Clause 50(3) to give guidance about relative pricing for the same
service among different customers; OFCOM should then be obliged
to publish proposals relating to pricing in respect of universal
service conditions, including the anticipated effects on the market
of the universal service in question and the arrangements (if
any) proposed for recovering the relevant costs; the Secretary
of State should then make a final determination.

157. Clauses 55 to 57 provide for the establishment
of a mechanism for "burden-sharing". They reflect Article
13 of the Universal Service Directive which states that, where
an NRA decides a universal service provider is subject to an unfair
burden, Members States shall, upon request from that provider,
introduce a mechanism for public funding and/or an arrangement
for burden-sharing between providers of electronic communications
and networks. Clause 55 allows for a review of the costs of complying
with universal service conditions. Clause 56 enables a burden-sharing
scheme to be established upon an application by the provider involving
contributions by communications providers to whom general conditions
apply. AOL UK expressed concern about the possible deterrent effect
of such charges on new market entrants and argued that any future
universal service obligation relating to broadband ought to be
funded from the public purse.[300]
We recommend that, in its response to this Report, the Government
clarify whether it considers that public funding of the kind permitted
under Article 13(1)(a) of the Universal Service Directive could
be made available without explicit legislative provision. We also
note that the Government has not made direct provision for the
exemption of undertakings with limited turnover, as permitted
by Article 13(3). We recommend that the Government should either
confirm that such exemption would be possible under Clause 56
as drafted or, if not, make such provision in the final Bill.

159. The importance of future success in regulation
of access by OFCOM is thrown into sharp relief by the experience
of Oftel in the regulation of Local Loop Unbundling. This is
the process whereby BT's competitors should have been given access
to BT's exchanges in order to deliver their own high-speed services
via BT's local telephone wires.[304]
The slow process of providing access for BT's competitors was
characterised by some witnesses as a regulatory failure: it was
suggested that BT had placed hurdles in front of its competitors
while developing, at its own pace, its own high-speed product.
Some contended that there had been a regulatory presumption that
BT did not have a dominant position in what was a relatively new
market. They argued that this presumption, coupled with the complexity
of the information that Oftel had to obtain from BT itself before
being able to act, had crucially inhibited regulatory action at
the key stage in the potential development of an open and competitive
market.[305]

160. BT did not accept this characterisation of Local
Loop Unbundling; it contended that the main constraint upon the
process had been the costs involved in relation to the market
available, rather than any endeavour by BT to drag its feet.[306]
David Edmonds argued that Oftel's actions had been broadly successful
in establishing a competitive market, although he accepted that
"it has taken a year longer than I would have hoped".[307]
AOL UK endorsed the view that Oftel's regulatory actions had eventually
been effective, but considered that the slowness of those actions
had inhibited the development of a broadband market in the United
Kingdom.[308]

161. One of the central lessons of Local Loop Unbundling
relates to the speed of regulatory action; we have already made
specific recommendations (in paragraph 85) designed to tackle
this problem. More generally, between March 2000 and February
2002, at a time when Oftel had Competition Act powers, it chose
to apply ex ante rules, in the shape of 37 directions and
determinations, showing that the risks of "foreclosure"
by an operator with significant market power are not necessarily
offset by the setting of conditions. Competition rules may have
to be more aggressively applied to remove barriers to entry rather
than simply to prevent abuse; dominance per se can be the
problem. This is a matter which may be addressed by Enterprise
Act powers, which will be available to OFCOM and to which we return.

162. Given the key importance of access-related conditions
to the future of regulation, the provisions of the draft Bill
to provide a new unified framework for such regulation have attracted
surprisingly little comment. The BBC was almost alone in finding
a fault concerning access-related conditions. Clause 59 allows
for conditions to be set relating to electronic programme guides.
Clauses 209 and 210 require OFCOM to prepare an enforceable code
for providers of such guides. Clause 209(2) and (3) requires OFCOM
to establish practices in that code relating to prominence for
public service television channels. The BBC regretted the absence
of equivalent provision for public service radio channels.[309]
BSkyB viewed such specific provision as unnecessary given the
current prominence accorded to BBC radio channels.[310]

163. The provisions of Clauses 59, 209 and 210,
taken together, appear to us to provide ample provision to enable
OFCOM to secure appropriate prominence for public service radio
channels if it is satisfied that there is evidence that such regulatory
action is proportionate and necessary. It is important that OFCOM,
in preparing the Code, should have regard not only to the interests
of public service broadcasters, but also to the interests of commercial
broadcasters, whose classification by genre, listing and degree
of prominence in programme guides may be instrumental to their
business and who will need transparency in determining these matters;
and, if they are dealt with unfairly, a right to appeal for independent
determination by OFCOM.

165. The concept of dominance as established by European
Community law and jurisprudence is already transposed into United
Kingdom law in the Competition Act 1998. The OFT has reflected
Commission procedures in its own guidance on Assessment of
Market Power.[312]However, procedures under the Competition Act and those proposed
under the draft Bill are quite distinct. The OFT (and, in future,
OFCOM) exercise powers under the Competition Act in relation to
abuse of dominance. The procedures of the Framework Directive
and the draft Bill are engaged by the mere existence of dominance
and are thus pre-emptive in character.

166. Unlike the procedures for the other conditions
that we have examined in this chapter, a crucial role in SMP procedures
is played by the European Commission. Under Article 15 of the
Framework Directive, the European Commission, after consultation
with the public and NRAs, will issue guidelines on identifying
markets, analysing markets and determining what constitutes SMP.
David Edmonds acknowledged that a more harmonised approach was
being sought across the European Union and that there would be
more centralised direction, but was confident that proper discretion
for decisions about markets would remain with OFCOM, rather than
such matters being decided in Brussels.[313]

167. The next stage of the process is the identification
by OFCOM of markets, which may or may not be national markets,
in which the procedures may be engaged, taking account of the
Commission guidelines.[314]
According to the Government, "Oftel will be embarking as
soon as possible (once the Commission guidelines have been published)
on the necessary market reviews envisaged by the Directives".[315]
Initial decisions on notification of SMP conditions are to be
made at this stage. Notification sets out the market OFCOM is
proposing to identify for the purpose of a market power determination,
the market power determination that they are proposing to make
and the reasons for these proposals. Notification is passed both
to the undertaking concerned and to the European Commission.[316]
At this stage, during the consultation process, the European Commission
can require OFCOM to withdraw its proposal, either because the
market identification does not comply with the Commission recommendations
or on internal market grounds.[317]
At the conclusion of the consultation period, OFCOM may make a
market power determination under Clause 64.

168. In general terms, and subject to remarks we
make shortly about Clause 67 that may affect earlier provisions,
the provisions of Clauses 64 to 66 appear to establish satisfactorily
the requirements of the Framework Directive and the roles of OFCOM
and the European Commission in these activities. BT raised one
concern. In reaching decisions on market identification and on
market power determination under Clause 64, OFCOM is required
"to have regard, to such extent as they consider appropriate,"
to Commission guidelines and recommendations. Under Article 15
of the Directive, NRAs are enjoined to take "the utmost account"
of these documents.[318]
Given the Commission's power of veto, it would be strange indeed
if OFCOM did not take full account of the Commission's position.
Nevertheless, we recommend that the Government consider whether
it is satisfied that the current drafting of Clause 64 fully reflects
the spirit of OFCOM's obligations in respect of European Commission
recommendations and guidelines.

169. We have slightly broader concerns about the
terms of Clause 67. This seeks to give effect in United Kingdom
law to requirements arising from Article 16 of the Framework Directive,
Article 7 of the Access Directive and Articles 16 and 18 of the
Universal Service Directive.[319]
We are not convinced that the Clause does so effectively. The
kernel of most of the Articles that we have listed is the onus
they seek to place on NRAs to review markets to see whether sector-specific
controls are still necessary or whether a market is "effectively
competitive". This is to be read in the context of the preamble
to the Framework Directive which states:

"It is essential that
ex ante regulatory obligations should only be imposed where
there is not effective competition, i.e. in markets where there
are one or more undertakings with significant market power, and
where national and Community competition law remedies are not
sufficient to address the problem."[320]

 Patricia Hewitt summarised this policy
herself concisely and clearly and thought that there was a clear
"duty on OFCOM to review the markets and withdraw from sectoral
regulation when competition is operative".[321]
The mobile phone operators did not agree. They expressed concern
that this underlying principal purpose of market analyses was
not reflected in the draft Bill.[322]
This was understandably linked to their view, endorsed in some
measure by the Better Regulation Task Force, that the market in
which they operated was "effectively competitive" and
not in need of sector-specific regulation.[323]

170. The draft Bill does make reference to "the
need to secure effective competition in the long term", but
only in the more specific context of SMP conditions about access.[324]
We recommend that Clause 67 be amended to place it beyond doubt
that the aim of market analyses is to determine whether a specific
market is "effectively competitive" and to ensure that
SMP conditions are only imposed where there is not effective competition.
We further recommend that other provisions on SMP and sector-specific
regulation more generally be reviewed to ensure that they reflect
the same principle.

171. We have two further points about Clause 67 as
it stands. Article 16(1) of the Framework Directive requires NRAs
to undertake market analyses as soon as possible after Commission
recommendations are adopted or updated and this is properly reflected
in a duty on OFCOM under subsection (4). However, Article 7(3)
of the Access Directive imposes an additional requirement as follows:
"Member States shall ensure that, as soon as possible
after the entry into force of this Directive, and periodically
thereafter, national regulatory authorities undertake a market
analysis".[325]
Subsection (2) merely states that OFCOM "may from time to
time, as they think fit, carry out further analyses of the identified
market". This does not appear to us to be a proper translation
of the provision of the Access Directive we have just quoted,
since subsection (2) implies a discretion in undertaking periodic
reviews.[326] We
recommend that Clause 67 be amended to make clear the mandatory
character of periodic market analyses.

172. BT has pointed out that Article 16(1) specifies
that "Member States shall ensure that this analysis is carried
out, where appropriate, in collaboration with the national competition
authorities". It expresses concern that the draft Bill does
not make reference to this duty, given the value of involvement
by OFT in market analysis.[327]
A clue to the Government's intentions is provided by two letters
in its Table on the transposition of the Framework Directive -
"SI".[328]
We presume this means that the Government intends to give effect
to this duty by statutory instrument. We recommend that the
Government clarify this matter in its response to our Report and
ensure that the main terms of any secondary legislation giving
effect to this provision are made known to Parliament at an early
stage of the Bill's passage.

173. Clauses 68 to 73 make more detailed provision
about SMP conditions relating to access, pricing, services for
end-users and leased lines. As we noted before in the context
of access-related conditions generally, these provisions have
attracted surprisingly little comment given their crucial importance
in OFCOM's regulatory toolkit. Freeserve was concerned that Clause
69 was couched in terms of circumstances when obligations are
not to be imposed, rather than requiring their imposition to prevent
price distortions arising.[329]
We remain to be convinced either that there is a substantive difference
between these positions or that Clauses 68 and 69 fail to mirror
the provisions of Article 13 of the Access Directive. Although
the provisions of Clause 68(4) very closely follow those of Article
12(2) of the Access Directive, we are concerned at the adequacy
of the concept of "feasibility" in paragraph (b) of
both provisions. We recommend that the Government (a) consider
whether it would be compatible with the terms of the Access Directive
to enable OFCOM to have regard to the costs of provision of the
proposed network access, as an explicit aspect of feasibility
under the terms of Clause 68(4), (b) report on the outcome of
that consideration in its response to this Report, and (c) reflect
that factor in the final Bill if it considers it possible and
appropriate to do so.